Archives for October 2010

The air will be thick with the sound of public spending cuts on Wednesday and we will be pouring over them live on air from 11.30am til 3pm in a Daily Politics Mega Special on BBC2 and the BBC News Channel.

All the emphasis will be on the public sector -- what parts have been cut the most, which have survived relatively unscathed -- so before we all get absorbed with that I thought it might be useful to look at the state of the private sector. After all, the Coalition Government expects the private sector to take up the slack created by public sector cuts. Is that credible?

We won't really know until it happens but one thing that is not widely realised -- and rarely commented on -- is that for an economy only slowly emerging from recession the UK private sector is in reasonably good shape.

In the past 12 months well over 300,000 new private sector jobs have been created. True, many are part-time (though they could become full-time as the economy recovers) but over half are not -- which means a lot more full-time jobs have been created in the private sector in the past 12 months than have been lost in the public sector. That's the main reason unemployment continues to nudge down.

Of course, the bulk of the public sector job losses have yet to come. The Office of Budget Responsibility reckons that 80% of the job losses won't happen until 2013 and after. Just 40,000 are expected to go in 2011 and another 40,000 in 2012. So employment is likely to continue to grow over the next two years, even as the cuts start to bite, because private sector job growth will outpace public sector job losses.

But what then? The public sector will shed several hundred thousand jobs in the years after that -- maybe as many as 450,000. The Coalition's hope is that by then the private sector will be in robust growth and creating a lot more new jobs than the public sector is shedding. It's a stretch -- but not impossible if the economy gets back to growth close to 3% a year.

Look at the early 1990s when public sector job losses were last heavy: 75,000 went in 1994, 90,000 in 1995 and 110,000 in 1996. Yet these large losses -- painful for all those who lost their job -- were dwarfed by the growth in private sector employment, so that when Labour won in 1997 unemployment was on a firmly downward path -- despite the shrinking of the public sector.

But can the private sector stage a repeat -- and this time on a bigger scale? The signs are not entirely depressing. Corporate earnings are recovering fast as companies trim costs and exploit markets that are growing once more. UK profit growth is expected to outpace the global average for the first time in almost two decades.

So companies are flush with cash in their corporate bank accounts. At the same time, because investment collapsed during the recession, many are reaching capacity restraints. They will have to invest to take advantage of growing order books -- and they have the money to do just that.

Recovering profits, recent low investment, capacity constraints and modest growth in demand -- that is a potential recipe for investment to rebound. And it looks as if it might: recent surveys of Chief Financial Officers found that many companies were indeed poised to invest.

At the current rate of private sector job growth, over 1m new private sector jobs would be created by the time the cuts are complete in 2015. If that was to happen -- and there are many reasons why it might not, such as a double-dip recession at home or a rise in protectionism abroad -- then the large and painful loss of public sector jobs coming down the pike would be more than compensated for by a rise of private sector jobs. Whether these would be as well-paid or as satisfying as the public sector jobs lost only time will tell.

If Rosy Scenario has her day (and it is a Big If) then we might have been concentrating on the wrong problem for the Coalition. A compensatory rise in private jobs would make the current cuts less politically damaging than most of us currently think. A bigger political problem for the Coalition that is currently being ignored is the manner in which very low growth in earnings (which could be exacerbated by the switch from public to private sector jobs) coupled with an increase in various taxes is seriously cutting the purchasing power of the take home pay of the average earner.

Figures I've seen suggest that living standards for those on average incomes are now in decline -- it is as if there's been a national pay cut thanks to very low wage growth and a very strong rise in taxes and prices (the highest in Western Europe) -- and that's before the rise in VAT to 20% in January. The squeeze on earning power is probably the toughest for almost 30 years.

David Cameron makes his first address today as Prime Minister to a Tory conference which has been hijacked by one of his Chancellor's own policy initiatives.

George Osborne has a habit of stealing the Tory conference limelight (remember his pledge to raise the inheritance tax threshold to £1m?) in a way that cheers the Tory faithful. Not so with his promise to abolish child benefit for higher-band income tax payers. This has dominated - indeed hijacked - the Birmingham conference in a way that Tory party managers never envisaged - to such an extent that no other message is getting out of Brum to the wider public.

David Cameron has had to tour the studios trying to hose down the forest fire of complaints from stay-at-home mums and the Mumsnet crowd.

His Chancellor has had to write privately to every Tory MP to convince them that his wheeze really is a good idea. Both have hinted that they might revive the old Tory plan to give married couples a tax break, though that was never meant to apply to higher-rate payers and wouldn't fully compensate them for the loss of child benefit anyway.

The irony is that most of the Tory activists in Birmingham do not object to the principle of stopping child benefit for the better off. They just object to the unfair and anomalous way in which it's being done (see my previous blog). They are even prepared to contemplate the end of universal benefits in general, with everything means-tested and concentrated on the less well off. But the party leadership has lost its appetite for this wider debate in the wake of the debacle over child benefits.

The Tory leadership will take comfort from a poll in this morning's Sun showing the withdrawal of child benefit from higher earners to be more popular with the country at large than it is with the Tory conference. But voters are hardly likely to object to a change which does not harm 85% of earners. It is the damage to the core Tory vote that Mr Cameron's folk need to worry about -- and not just those already in the higher tax brackets.

This afternoon Mr Cameron, in an effort to shift attention away from child benefits, will extol the virtues of the "doers and grafters" in society, in an echo of Margaret Thatcher's championing of the country's strivers three decades ago. But most of Mr Cameron's strivers are precisely those who hope very soon their hard work will take them into the £40,000-plus bracket -- and when they do will now be clobbered by an expensive loss of child benefit which will leave them worse off.

This afternoon we will hear a lot about the sunny uplands of the Tory Promised Land once the spending cuts have worked their way through the economy.

Several passages will mark a return to his "let sunshine win the day" rhetoric, which might stir the faithful but is meaningless to the wider public.

Mr Cameron will attempt to put child benefit behind him and send the Tory grassroots away with a spring in their step. The latest polls suggest he's in a better place than the mood of this conference would indicate.

But however uplifting the rhetoric the Tory conference of 2010 will forever be remembered as the one hijacked by a cack-handed announcement that, in principle, most folks think is reasonable.

I'd love to be a fly on the wall when the post-mortem takes place at Tory HQ back in London.

In principle, they're inclined to agree that it is "bonkers", as Iain Duncan Smith put it, that those earning over £50,000 a year qualify for child benefit. In practice, they're not so sure because they think these are already hard times for the middle class and this is another serious financial blow.

The middle class think they've already borne the brunt of Labour's tax and national insurance rises, which the Tories have no plans to reverse.

More and more are being sucked into the 40% income tax bracket because the level at which it hits has not been raised in line with inflation (again no Tory proposals to change that), the return on their savings has plummeted in the wake of the financial meltdown and in many cases their pensions have been shot to shreds.

Younger affluent couples will also worry about how to cope with the massive rise in university tuition fees coming down the pike. When the Chancellor repeats ad nauseum that "we're all in this together" the middle class can chorus "too right we are".

Then there are the anomalies in what is being proposed. If the family has one wage earner making £50,000 a year then child benefit will be forfeited. But if it has two earners making £40,000 each then child benefit will still be paid because neither earner is in the 40% tax bracket.

The Chancellor says for it to be otherwise would involve complicated means-testing. But since the change won't come in until 2013 many will think he has plenty of time to make the changes more equitable.

Most commentary on deficit reduction has concentrated on the likely response of the public-sector unions, with threats of strikes and demonstrations.

But a Tory-led coalition government might be about to see something much more dangerous to its long-term interests: a middle-class backlash.

At least it casts doubts on the Marxist claim that Tories always act in their own class interests.

About this blog

I'm Andrew Neil, presenter of live political programmes The Daily Politics and This Week. I'm also a publisher and business consultant. I'm blogging here about the politics, personalities and prospects around my BBC programmes.

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